Who Benefits From Labour’s 25-Year Fixed Mortgages?

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Labour has committed to a significant overhaul of the mortgage market, championing the introduction of 25-year fixed-rate mortgages for a large segment of homeowners. Rachel Reeves, the shadow chancellor, emphasized the benefits of longer fixed-rate deals, facilitating property purchases with smaller deposits and lower monthly repayment commitments. Drawing inspiration from countries like the US, Canada, and Japan, where extended mortgage terms are prevalent, Labour’s proposal distinguishes itself by not suggesting taxpayer underwriting. Rachel Reeves encourages collaboration with the mortgage industry to navigate regulatory challenges and instigate a broader cultural shift as part of Labour’s ongoing financial services review.

Richard Donnell, Zoopla’s Head of Insight, supports the idea of 25-year fixed-rate mortgages, emphasizing their potential advantage for first-time buyers. He acknowledges the challenge lies in ensuring the competitiveness of these rates compared to shorter-term deals, as this factor plays a crucial role in encouraging individuals to opt for longer-term arrangements.

Donnell underscores the current scenario where mortgage costs and rents are comparable, even at 4.5% rates. However, he points out a significant hurdle for new borrowers who undergo stress tests based on higher rates ranging from 8% to 9%. This discrepancy poses a risk, especially for first-time buyers, making it harder for them to secure mortgages and contributing to the rise in rents. The confluence of historically high house prices and the struggle to accumulate substantial deposits further complicates the situation for those aiming to enter the property market.

In light of these challenges, the prospect of 25-year fixed-rate mortgages could offer a viable solution, particularly for first-time buyers. Nevertheless, addressing the issue of competitive rates remains pivotal to incentivize individuals to adopt this mortgage model, potentially reshaping the dynamics of the housing market.

“The advantage of long-term fixes is it means you probably avoid the need to stress-test affordability,” Mr Donnell says.

“I believe the government needs to look at how it can support the market for longer-term rates to develop at rates that will support demand for this type of product, as it’s a big mindset change.”

Would Britons really want to lock in?

Kevin Roberts, Managing Director at Legal & General Mortgage Services, expresses skepticism about the current viability of 25-year fixed-rate mortgages. He notes that although these options already exist in the UK, they attract minimal attention. Roberts highlights the common preference for shorter-term products with lower rates, such as two or five-year fixes, indicating a prevailing trend in consumer choices.

David Hollingworth, Director at L&C, shares a similar view, emphasizing the need to address pricing and tie-ins to potentially expand the appeal of 25-year fixed-rate mortgages. He suggests that until these aspects are reconsidered, these mortgages may remain a niche option rather than a widespread choice in the market.

Two other major drawbacks

David Hollingworth raises a pertinent issue regarding longer-term fixed deals, pointing out that they often come with an early repayment charge throughout the fixed-rate period. This limitation can pose challenges if the borrower needs to review the mortgage, such as when considering a house move. The options become more constrained, and there’s uncertainty about meeting lender criteria or accessing competitive rates for any additional borrowing.

Moreover, there’s a valid concern about the potential scenario where interest rates drop significantly, similar to what occurred after the 2008 financial crisis. Mr. Hollingworth notes the apprehension among borrowers that they might be left in a disadvantageous position if rates were to fall post the mortgage commitment, adding a layer of complexity to the decision-making process.